Following his meeting with the private sector economists, Mr. Flaherty was asked about the possibility of a balanced budget, or even a surplus, in 2014-15 – one year ahead of the government’s commitment to eliminate the deficit by 2015-16.  The Minister did not directly answer the question, but did not explicitly rule out the possibility either.  What are the chances that the deficit could be eliminated a year earlier? Even if the chances were good, why would the government want to announce it in the 2014 budget?

In the November 2013 Economic and Fiscal Update, Mr. Flaherty forecast a deficit of $5.5 billion for 2014-15.  However, this projection includes a “risk adjustment factor” of $3 billion.  Assuming that this risk adjustment is not required, and all other things remaining equal, the deficit would fall to $2.5 billion in 2014-15. The deficit is the difference between two very large numbers - revenues of $277 billion and total expenses of $283 billion in 2014-15.  An improvement of $2.5 billion is well within the margin of a “rounding error”. A slight increase in revenues and/or a slight decline (a half a percentage point on both revenues and expenses) would easily produce a surplus. As such, looking only at 2014-15, a balanced budget or surplus is a very distinct possibility.

However, to achieve a balanced budget in 2014-15 would require a decline of $17.8 billion from the current deficit for 2013-14.  Adjusting this deficit forecast for the “risk adjustment factor” (the November 2013 Update included an adjustment of $1.5 billion) as well as the liability for natural disasters of $2.9 billion would require a year-to-year improvement of $13.5 billion. In the current economic environment, such improvement would appear to be unrealistic. 

Virtually all of the decline in the deficit would need to come from increased economic growth.  Real gross domestic product (GDP) is currently projected by the Finance Department to increase by 2.4% in 2014, compared to 1.7% in 2013.  Nominal GDP, the applicable tax base for federal revenues, is projected to advance by 4.2% in 2014, up from 3% in 2013. Using the “Sensitivity of the Budgetary Balance to Economic Shocks” presented in the November 2013 Update, higher nominal economic growth of 1.2 percentage points in 2014 could improve the budgetary balance by about $4 billion, well short of $13.5 billion required. 

These calculations are based on the assumption that the deficit forecast for 2013-14 will turn out to be fairly accurate. If, however, the deficit for 2013-14 were to come in much lower than forecast in the November 2013 Update, then the possibility of a balanced budget or surplus increases considerably for 2014-15.Unfortunately for Mr. Flaherty, the final deficit outcome will not be known until the fall of 2014   Some information on what could happen may be found in the monthly financial results reported in the Fiscal Monitor. So far, the fiscal information does not suggest that the outcome for 2013-14 will be much better, if at all, than currently projected. This monthly data, however, was very misleading with respect to the final outcome for 2012-13.

The current forecast of the deficit depends significantly on the government achieving the full cost savings of the restraint measures introduced in previous budgets and Updates. Details of the impact of these measures, as requested by the Parliamentary Budget Officer, have not been forthcoming.  Many of the proposed savings are to come from “back office” savings, implying delivering current programs more efficiently and effectively.  But how realistic is this? The fact is we know very little about the governments “restraint measures” and whether they will actually be realized. If not, then the possibility of a balanced budget in 2014-15 and 2015-16 would be unlikely. The final budget outcome for 2015-16 will not be known until the fall of 2016, a year after any election.

Mr. Flaherty is right to be cautious in his budget projections, given the risks associated with economic and fiscal forecasting.  If the deficit for 2013-14 comes in much lower than currently estimated, it could well be because of additional prudence he has “buried” into his budget forecast.  Both he and the Prime Minister criticized this practice when they were in Opposition.  To date, Mr. Flaherty has been unable, or unwilling, to explain why the deficit for 2012-13 came in so much lower than originally forecast.  He may well be in the same position again when the final results for 2013-14 are released.

Even if there were a reasonable chance of a surplus in 2014-15, Mr. Flaherty would be wise not to show it his upcoming budget. He should learn from his previous experience.  Since 2006, he has yet to meet any of the targets set by his government.  He has had to change the timeline for the achievement of a balanced budget from 2015-16 in the March 2011 Budget, to the medium term in the March 2012 Budget and back to 2015-16 in the March 2013 Budget.  He now wants to be 100% certain that he can deliver on the 2015-16 commitment.  

If things turn out better and it looks fairly certain that there could be a surplus in 2014-15, then he could announce it in the 2014 Economic and Fiscal Update, setting the stage for an early election budget and possibly even an early election.

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